Debunking the Myth

We’ve heard it before:

  • “Health insurers are gouging the consumer.”
  • “Free market principles will reduce healthcare prices if people have to pay for it out of their own pocket.”
  • The Affordable Care Act is a Machiavellian scheme by insurance companies to make a windfall profit.

Americans spend more per capita and the highest percentage of GDP on healthcare than any other OECD country. Why are healthcare costs rising at a rate that is higher than anywhere in the world? Are the insurance companies price gouging?

A Brief Primer on Risk management and Health Insurance

Insurance is a form of risk management used to hedge against the risk of a contingent, uncertain loss through the equitable transfer of the risk of a loss, from one entity to another, in exchange for payment.

The insurance transaction involves the insured assuming a guaranteed and known relatively small loss in the form of a premium payment to the insurer in exchange for the insurer’s promise to compensate the insured in the case of a personal financial  loss. In health insurance, morbidity risk and historical costs are averaged and apportioned among subscribers. Subscribers pay a premium each month even when they don’t avail themselves of the services, because when they finally do need medical services, the costs can be financially devastating.

Why are Health Care Premiums Rising?

Health insurance premiums have nearly doubled since 2000, growing 3 times faster than wages. Are insurers are gauging consumers? Insurance profits account for just 3% of health care costs, while providers and suppliers are responsible for 76%.

Insurance companies provide shared risk services by  apportioning the costs of health care services among the subscriber pool.  They are responding to increasing  costs, not setting them.  Forced to respond to rising costs in the health care market, they find themselves at the forefront of the battle, implementing strategies to reduce costs and keep the premiums affordable. Strategies include negotiating better rates with providers, working to provide better outcomes, audits of physician group standards and practices, and piloting alternatives to fee-for-service payment.  However, it seems that, as fast as the insurers get a handle on costs, providers respond by raising their own costs to pass the upstream costs to the consumer and it’s representative, the insurers.

Myth: Making Americans Pay More Will Bring Down Health Care Costs

A recent market response to increasing health care provider costs is that employers are increasingly purchasing plans that allow for greater employer-employee cost sharing, purchasing plans under which the employees’ share of the costs higher. They are also opting for more affordable plans with increased out-of-pocket deductibles and coinsurance payable by insureds.

A shrinking market doesn’t make insurance companies more profitable, but places greater pressures on them to stay afloat and remain profitable, and one problem is that increasing premiums and decreasing benefit payments pressure healthier individuals to opt out of the premium pool, causing adverse selection risk which raises premiums for everyone.

And the statistics show that, although increasing numbers of American families are responsible for a greater share of their health care costs, provider costs still just continue to increase.

Given the rising costs of health care services, with each passing year, families face increasing deductibles, copayments, and other out-of-pocket expenses, requiring them to make difficult decisions to make ends meet. Today, middle class American families with high out-of-pocket expenses spend 21 percent of their income on health care services – not including premiums.

One recent survey estimated that 72 million, or 41 percent of nonelderly adults have accumulated medical debt or had difficulty paying medical bills in the past year, even though a 61 percent majority had health insurance. These high-cost households pay an average of 18 percent of their household income on health care expenses, not including premiums, vs. an average of 1 percent for the other households. High-cost households shoulder 43 percent their total health care expenditure burden on their own, compared to an average of 17 percent for other households.

Those who experience the highest levels of out-of-pocket costs are more likely to be women and the older. They are also significantly more likely to suffer from common diseases such as diabetes, heart disease, and cancer – they are three times as likely to have cancer, diabetes, or heart disease, and twice as likely to have high blood pressure as people in lower-cost households. 71 percent of individuals in high-cost households had one or more chronic conditions compared to 44 percent of individuals in lower-cost households. 33 percent in high-cost households have three or more chronic conditions, compared to 10 percent in lower-cost households.

Upstream Costs Continue to Rise

An article at the Huffington Post titled Typical Hospital Wastes Up To $3.8 Million A Year On Readmissions: Study identifies some of the cost issues perpetrated by provider groups.

A typical hospital with 200 to 300 beds wastes up to $3.8 million a year, or 9.6 percent of its total budget, on readmissions of patients who shouldn’t have had to come back, says Premier, a health care company that advises hospitals on improving efficiency and safety. The company analyzed the records of 5.8 million incidents in which a patient went back to a hospital to be re-treated and found they added $8.7 billion a year, or 15.7 percent, to the cost of caring for those people…Hospitals are ground zero for health care cost-containment efforts because they are the biggest recipients of America’s health care spending, having taken in $814 billion in 2010, according to a federal government report.

According to the article, wasteful spending in the U.S. health care system has been estimated to be as high as $850 billion each year, according to a 2009 Thomson Reuters report. Overall health care spending rose by a factor of 10 between 1980 and 2010, when it reached $2.6 trillion.

The health care reform law enacted two years ago expands on efforts begun three years ago to link how much Medicare pays hospitals to how well they reduce medical errors, readmissions, and other inefficiencies. Starting next year, hospitals will see their Medicare payments docked by 1 percent if they don’t cut back on these readmissions. The penalty increases to 3 percent in 2015.

Premier’s message to hospitals feeling squeezed: The money you need to save is already in the system. The company has identified 15 steps hospitals can take to improve the care they provide while also saving money, such as making sure patients are treated right the first time and don’t need to be “readmitted” for more care. By analyzing information culled from its hospital partners, Premier recommends other targets for savings, such as performing fewer blood transfusions and limiting costly tests.

A  report by Robert Kelley, vice president of healthcare analytics at Thomson Reuters, found.shows that the U.S. healthcare system wastes between $505 billion and $850 billion every year.

“America’s healthcare system is indeed hemorrhaging billions of dollars, and the opportunities to slow the fiscal bleeding are substantial,” the report reads. “The bad news is that an estimated $700 billion is wasted annually. That’s one-third of the nation’s healthcare bill,” Kelley said in a statement. “The good news is that by attacking waste we can reduce healthcare costs without adversely affecting the quality of care or access to care.”One example — a paper-based system that discourages sharing of medical records accounts for 6 percent of annual overspending. “It is waste when caregivers duplicate tests because results recorded in a patient’s record with one provider are not available to another or when medical staff provides inappropriate treatment because relevant history of previous treatment cannot be accessed…The average U.S. hospital spends one-quarter of its budget on billing and administration, nearly twice the average in Canada,” reads the report, citing dozens of other research papers.

Some other findings in the report from Thomson Reuters (the parent company of Reuters):

  • Unnecessary care such as the overuse of antibiotics and lab tests to protect against malpractice exposure makes up 37 percent of healthcare waste or $200 to $300 billion a year.
  • Fraud makes up 22 percent of healthcare waste, or up to $200 billion a year in fraudulentMedicare claims, kickbacks for referrals for unnecessary services and other scams.
  • Administrative inefficiency and redundant paperwork account for 18 percent of healthcare waste.
  • Medical mistakes account for $50 billion to $100 billion in unnecessary spending each year, or 11 percent of the total.
  • Preventable conditions such as uncontrolled diabetes cost $30 billion to $50 billion a year.
  • American physicians spend nearly eight hours per week on paperwork and employ 1.66 clerical workers per doctor, far more than in Canada,” (quoting a 2003 New England Journal of Medicine paper by Harvard University researcher Dr. Steffie Woolhandler.)

All this could help explain why Americans spend more per capita and the highest percentage of GDP on healthcare than any other OECD country, yet has an unhealthier population with more diabetes, obesity and heart disease and higher rates of neonatal deaths than other developed nations.

Blaming the Victim?

The solutions that we see publicized in the national health care debate ignore the upstream forces that push costs up. Insurance companies aren’t the problem. They’re the ones who make care procedures affordable, using sound principles of risk management. They are heavily regulated both at the federal and state levels, and are doing what they can to attempt to keep the health costs from rolling higher.  The threat isn’t the insurers but the lack of accountability at the provider level.

For example,the Affordable Care Act requires new medical loss ratio regulations make insurance marketplace more transparent and requiring insurers to spend premium dollars on care. These new regulations issued by the Department of Health and Human Services (HHS) require health insurers to spend 80 to 85 percent of consumers’ premiums on direct care for patients and efforts to improve care quality.  If they don’t, the insurance companies will be required to provide a rebate to their customers starting in 2012.

“Thanks to the Affordable Care Act, millions of Americans will get better value for their health insurance premium dollar,” said HHS Secretary Kathleen Sebelius.  “These new rules are an important step to hold insurance companies accountable and increase value for consumers.”

Yet, with all the regulation directed at insurers, and government providing insurance-based healthcare solutions like Medicare and Medicaid, it seems that little attention is being paid to the upstream providers who set the costs.

While  some argue that the market should prevail and providers should continue to set their pricing at whatever levels they see fit, some providers provide a sliding scale based on need, which is a recognition of the problem closer to its causes. Somehow government solutions don’t address the causes and simply aim to regulate the consumer and his/her representative – the insurer, kicking the can and passing the buck without reforming the problem area.

In this blog, I will continue to explore the healthcare system, highlighting the innovative solutions that the health insurance industry continues to implement to contain costs, while also examining the upstream sources of the problem.

Snap principle of the rising consumer health care costs:

Insurers are at the forefront of containing consumer costs, but the upstream providers need sweeping reforms.